What is a Share?
A share is simply a part of a company. If you own one share in a company that is your share of the whole company, just like if you have a piece of cake it is your share of the whole cake. A company can have as many shares as the directors decide and as few as one. The most common type of shares are called ordinary shares.
Unlike pieces of cake all ordinary shares are exacty the same size and carry exactly the same rights. Exactly the same amount of icing and exactly the same number of chocolate chips.
Companys can issue different classes of shares with different rights.
What is The Sharemarket?
The sharemarket is where shares are bought and sold or traded. Generally when talking about the sharemarket we are talking about the shares of listed companies. Listed companies are those that have agreed to be bound by the rules and regulations of the New Zealand stock exchange which is run by a company called NZX Limited (which is itself listed). The share market is a subset of the stock exchange, other securities also trade on the stock exchange, eg listed bonds.
The most famous stock exchange is in the USA and is located on Wall Street. That is why you might here on the news "... and on Wall Street share prices rose ..."
Listed companies tend to have millions of shares. For example at the time of writing Fletcher Building has over 692 million shares on issue.
A company has to be quite large before it is worthwhile listing and so the company has to be worth quite a lot, usually millions of dollars. When a company first lists it is common practise in New Zealand to create enough shares so each is worth about a dollar.
If a company is worth $5 million dollars, the directors might decide to create 5 million shares so each is worth $1 or they might decide to only create 2.5 million shares so each is worth $2.00.
For an existing company the market value of the company can be determined by multiplying the number of shares by the share price. This is also know as the market capitalisation. At the time of writing Fletcher Building is trading at $8.58 and so the market is valuing it at about $5.9 billion. 692 million shares times the price of $8.58 = $5.3 billion. So if you wanted to buy the whole company you'd have to buy all the shares so it would cost you $5.9 billion, please call us if that's the case!
So what is Equity and what are Stocks?
The terms share and equity and stock can be used pretty much interchangeably. The term equity is usually a dollar figure and a share is usually a number. Your equity in a company is how much of it you own.
Next week I'll try and explain how share prices are determined.
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